You rightly said the money as we know it is mostly product of commercial banks, giving credit. If traditionally the banks used to give loans to entrepreneurs, hoping that their venture will be successful and they will generate enough cash to repay the debt, it is not so anymore. Since the seventies the credit purpose shifted from credit to entrepreneurs to consumers credit.

After the 2007-2008 crisis the households credit started to shrink as percentage of the GDP. This shift happened as the financial markets became more and more sophisticated and the entrepreneurs diversified the sources of their financing, like corporate bonds, equity financing, stock exchange etc. The banks ceased to be the only possible source of financing. Add to it the decline of economic growth rate in the highly developed world, and you will understand that Banks had to make this dangerous shift to consumer credit, mainly mortgages for private houses, and here you have the inevitable, the 2008 year crash. The private households still did not recover from the debt crisis of 2008, and this is the reason why the economy is rather sluggish, the interest rates are close to zero, and the commercial banks are forced to keep reserves, much higher then required by the central banks. The only tool the central banks have to oppose this situation is to purchase the government bonds, reducing the interest rate close to zero, and hoping that it will work. It worked only partly, because the households still carry the debts and the trauma of high indebtedness. Not surprisingly some economist, who did not take in consideration the moral aspects of such a deed, suggested to write of some of these debts. Economically it could maybe even work, but what about the whole system of borrower-lender? It could disrupt the whole system of credit responsibility.
The central banks try an other form of intervention after no more government bonds were left on the market to purchase. They intend to purchase corporate bonds. But this would mean that certain corporations will get more easier to credit than others. Clear discrimination that will be probably unacceptable legally.

brodix Says:July 10, 2016 at 2:22 am | ReplyThanks, Eugen.Economists and bankers no more fully understand how the economy works, than weathermen fully understand the weather.
To top it off, much that is known is obscured. As I pointed out, much of the value of the money is backed by government debt, yet often politicians go all populist and rail about government spending, while those paying them off have piles of government bonds in their portfolios.
It has to keep cycling. The government borrows excess out of the private sector, including China Inc. and spends it back into other parts of the economy. Otherwise people might realize there is far more money than the system can actually absorb.
Are the people in charge of the military as incompetent as they seem, or are there other motives, like just spending as much as possible?
When the price of bread goes up, people think they are poorer, but if the stock price of the bread company goes up, those owning it think they are richer. So the game for the last 36 years has been to keep the excess out of the general economy and stuff it in the investment sector, but even that is getting saturated and investors are panicking about how to keep making money on their money.
Interesting times ahead.

EugenR Says:July 10, 2016 at 6:43 am | ReplyEconomists and bankers no more fully understand how the economy works……
Yes, as an economist i can tell you the confusion is great. All the theory of money gone. Zero interest rate and no inflation. People trust virtual money against all the odds. Governments print money as it was greeting cards, and still no inflation in the horizon. Real estate is sky rocketing everywhere where is enough trust, that the government will not confiscate property. Production costs efficiency of goods due to efficiency is dropping to zero (marginal cost of a car, without marketing and design costs, made of thousands of components produced all over the world costs less than an average salary). Oil price is in its historical low point. Services as entertainment and intellectual knowledge are given free of charge. (viz this blog).
Yet, people without originality and special skills are becoming irrelevant in the production process and either are becoming “dishwashers” or unemployed. Even if generously supported by the social systems, still unsatisfied, (viz the British coal miners voting for Brexit, inspite of generous pensions they received from the government ) and have revolutionary mood. Enough a charismatic leader, who is more committed to some case than the well known clown Boris and the world is again in danger of being grasped by some crazy nuts.